Worst Asian Default Forgiven as Indonesia Billionaire Sells Debt

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Sinarmas Group Founder Eka Tjipta Widjaja
Eka Tjipta Widjaja, founder of Sinarmas Group. Source: President Office, Sinarmas via Bloomberg

Foreign investors have either forgiven or forgotten the events that involved the billionaire Widjaja family in Asia’s worst corporate default.

Companies backed by 91-year-old Eka Tjipta Widjaja, Indonesia’s fourth-richest person, received orders twice the size of two bond issues last week at yields below the average of Asian junk-rated peers. Developer PT Bumi Serpong Damai raised $225 million from a debut sale of U.S. dollar notes. Golden Agri-Resources Ltd., the world’s second-largest palm-oil producer, issued S$125 million ($94 million) in its third sale in a year. The family is also preparing a bid for an Indonesian coal producer in the midst of a dollar-debt restructuring.

Fourteen years after Widjaja’s sprawling Sinarmas empire was pummeled by a $14 billion default by its Asia Pulp & Paper business, investors are showing faith in its credit. The combined market value of 12 family-controlled companies listed on the Singapore and Jakarta exchanges has held steady at about $15 billion over the past year. Moody’s Investors Service this month rated Bumi Serpong at Ba3, the third-highest junk grade, citing the developer’s healthy finances.

“There’s always going to be new investors keen to try their luck with the group even after the Asia Pulp & Paper debacle,” Charles Macgregor, head of Asia high-yield research in Singapore at Lucror Analytics, said by phone on April 23. “They will probably come back every now and then to re-establish their position in the debt market through some of their better businesses.”

Biggest Default

Asia Pulp & Paper halted payments on a total $13.9 billion of bonds, loans and trade payables in 2001, after a 20 percent plunge in global paper prices over three months. That included about $6.7 billion of dollar notes, the biggest missed bond obligation by an Asian company to date, data compiled by Bloomberg show. The firm became mired in legal challenges as Indonesian courts canceled debts and creditors lost millions.

Founded in 1972, the pulp and paper business controlled by the Sinarmas Group embarked on a global fundraising drive that included a 1995 U.S. share sale. Its failure came in the wake of the Asian debt crisis, when companies across the region defaulted on billions of dollars of liabilities and Indonesia was one of three countries forced to seek an International Monetary Fund bailout.

“All the corporate groups in Indonesia were suffering, especially during the 1998 Asian crisis, and Asia Pulp & Paper had tried to continue to service its debt right until we really had to give up in 2001 because of the deteriorating macro situation in the country,” Gandi Sulistiyanto, Sinarmas’s managing director in Jakarta, said by phone Monday. “Our group is responsible with its debt despite the bad, difficult past.”

Bond Comebacks

Bumi Serpong’s April 2020 dollar bonds traded at 100.497 cents as of 9:48 a.m. on Tuesday in Hong Kong to yield 6.631 percent, Bloomberg-compiled prices show. The notes, rated BB- by Fitch, were sold at par last week to yield 6.75 percent, compared with 7.34 percent for similar-rated bonds in a Bank of America Merrill Lynch Index. The yield on Golden Agri’s unrated 2018 notes had fallen to 4.955 percent on Monday from the 5.5 percent they priced at.

The Widjajas aren’t alone in debt comebacks. Other Indonesian companies have had financial troubles and then successfully returned to the dollar bond market. Property firm PT Kawasan Industri Jababeka, which reorganized debt in 2002, is selling more of its 2019 notes as early as Tuesday. PT Gajah Tunggal, the nation’s biggest tire-maker, issued $500 million of five-year notes in 2013, four years after a distressed bond exchange. Developer PT Pakuwon Jati restructured global notes in 2005 and went on to raise $200 million last year.

Family Stakes

The Widjaja family trust owns 65.6 percent of Sinarmas Land Ltd., which in turns owns 51.5 percent of Bumi Serpong, the developer of a planned community in the greater Jakarta area, according to the companies’ latest annual reports. The trust owns 49.95 percent of Golden Agri.

“The controlling shareholders and family’s willingness to serve debts is extremely important for emerging-markets investors,” said Mark Yu, a money manager and analyst at Atlanta-based Invesco Advisers Inc., which oversees $798 billion in assets. “Improvement in corporate governance and transparency definitely helps rebuild a track record. But regaining confidence from capital markets takes time and efforts to materialize.”

The latest Bumi Serpong notes were issued by an offshore special-purpose vehicle, similar to a structure that the Widjaja family has previously challenged in local courts, Lucror Analytics said in an April 20 report. Almost 90 percent of all Indonesian private corporate dollar notes have been issued via offshore entities.

Less Friendly

“Investors have to be mindful of the restructuring history of Indonesian corporates, especially given that many of them have had several reschedulings or restructurings in the past,” said Brigitte Posch, head of emerging market corporate debt at Babson Capital Management, which manages $217 billion in assets. “Investors also need to be familiar with the Indonesian insolvency framework, as it is not the most creditor friendly regime.”

The cost to insure Indonesia’s sovereign debt against nonpayment using credit-default swaps is little changed this year at about 161 basis points, according to data provider CMA. The rupiah has weakened 4.6 percent against the dollar, making it Asia’s second-worst performing major currency.

Recent Defaults

The nation’s companies have defaulted on $2.3 billion of U.S. dollar bonds since 2008, the most among regional corporates, according to Bloomberg data. Three units of coal miner PT Bumi Resources sought creditor protection in the U.S. in December after missing some payments on $1.375 billion of bonds, while PT Bakrie Telecom faced lawsuits from foreign investors in its debt restructuring.

Sinarmas is also committing as much as $300 million to a takeover bid for London-listed Asia Resource Minerals, which owns 85 percent of Indonesia’s fifth-largest coal miner PT Berau Coal Energy. If successful, the group may inject the Berau assets into its Singapore-listed Golden Energy & Resources Ltd. unit, according to an April 15 exchange filing.

The turnaround in Widjaja’s fortunes is splitting money managers who often reference the group’s history as a cautionary tale in emerging-market investing after the noteholder losses following Asia Pulp’s default.

Hal Hirsch, a managing director at New York-based Alvarez & Marsal Inc., which specializes in debt recoveries and is advising some of Bakrie Telecom’s bondholders, said that Indonesia can be “a dangerous corporate labyrinth for investors and regulators” due to a lack of transparency.

“History repeats and provides lessons -- even in finance,” he said.

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